Post-Closing Earnouts in M&A Transactions: Avoiding Common Disputes

February 1, 2011, Kevin R. Shannon, Michael K. Reilly

The prospective parties to an M&A transaction often have different views regarding the value of the subject company, which can make it difficult to agree upon a purchase price. Of course, such different valuation perspectives may not be surprising given that the value of a business typically is determined by reference to its expected future performance or cash flows. The seller may be optimistic with regard to the future prospects, and therefore ascribe a higher value to a business than the buyer, which may be more conservative. One common way to bridge the gap between the parties’ valuation positions is to have a portion of the purchase price based on the future performance of the company. Such a provision, which is often called an “earnout,” entitles the seller to receive additional payments if the business meets certain contractual targets post-closing.

Click the link below to read the full article that was originally published in the Winter 2011 edition of Deal Points: The Newsletter of the Committee on Mergers and Acquisitions of the Business Law Section of the American Bar Association.